VERNON DARTMOUTH GRAY, Plaintiff and Appellant, v. ZURICH INSURANCE COMPANY, Defendant and Respondent.
L. A. No. 28897
In Bank. Supreme Court of California
Oct. 25, 1966.
65 Cal. 2d 263
William J. Currer, Jr., as Amicus Curiae on behalf of Plaintiff and Appellant.
Moss, Lyon & Dunn, Gerold C. Dunn and Henry F. Walker for Defendant and Respondent.
TOBRINER, J.- This is an action by an insured against his insurer for failure to defend an action filed against him which stemmed from a complaint alleging that he had committed an assault. The main issue turns on the argument of the insurer that an exclusionary clause of the policy excuses its defense of an action in which a plaintiff alleges that
Plaintiff, Dr. Vernon D. Gray, is the named insured under an insurance policy issued by defendant. A “Comprehensive Personal Liability Endorsement” in the policy states, under a paragraph designated “Coverage L,” that the insurer agrees “[T]o pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage, and the company shall defend any suit against the insured alleging such bodily injury or property damage and seeking damages which are payable under the terms of this endorsement, even if any of the allegations are groundless, false or fraudulent; but the company may make such investigation and settlement of any claim or suit as it deems expedient.” The policy contains a provision that “[T]his endorsement does not apply” to a series of specified exclusions set forth under separate headings, including a paragraph (c) which reads, “under coverages L and M, to bodily injury or property damages caused intentionally by or at the direction of the insured.”
The suit which Dr. Gray contends Zurich should have defended arose out of an altercation between him and a Mr. John R. Jones.1 Jones filed a complaint in Missouri alleging that Dr. Gray “wilfully, maliciously, brutally and intentionally assaulted” him; he prayed for actual damages of $50,000 and punitive damages of $50,000. Dr. Gray notified defendant of the suit, stating that he had acted in self defense, and requested that the company defend. Defendant refused on the ground that the complaint alleged an intentional tort which fell outside the coverage of the policy. Dr. Gray thereafter unsuccessfully defended on the theory of self defense; he suffered a judgment of $6,000 actual damages although the jury refused to award punitive damages.
Defendant argues that it need not defend an action in which the complaint reveals on its face that the claimed bodily injury does not fall within the indemnification coverage;2 that here the Jones complaint alleged that the insured committed an assault, which fell outside such coverage. Defendant urges, as a second answer to plaintiff‘s contention, that the contract, if construed to require defense of the insured, would violate the public policy of the state and that, indeed, the judgment in the third party suit upholding the claim of an intentional bodily injury operates to estop the insured from recovery. Defendant thirdly contends that any requirement that it defend the Jones suit would embroil it in a hopeless conflict of interest. Finally it submits that, even if it should have defended the third party suit, the damages against it should encompass only the insured‘s expenses of defense and not the judgment against him.
We shall explain our reasons for concluding that defendant was obligated to defend the Jones suit, and our grounds for rejecting defendant‘s remaining propositions. Since the policy sets forth the duty to defend as a primary one and since the insurer attempts to avoid it only by an unclear exclusionary clause, the insured would reasonably expect, and is legally entitled to, such protection. As an alternative but secondary ground for our ruling we accept, for purposes of argument, defendant‘s contention that the duty to defend arises only if the third party suit involves a liability for which the insurer would be required to indemnify the insured, and, even upon this basis, we find a duty to defend.
These principles of interpretation of insurance contracts have found new and vivid restatement in the doctrine of the adhesion contract. As this court has held, a contract entered into between two parties of unequal bargaining strength, expressed in the language of a standardized contract, written by the more powerful bargainer to meet its own needs, and offered to the weaker party on a “take it or leave it” basis carries some consequences that extend beyond orthodox implications. Obligations arising from such a contract inure not alone from the consensual transaction but from the relationship of the parties.4
Although courts have long followed the basic precept that they would look to the words of the contract to find the meaning which the parties expected from them,5 they have also applied the doctrine of the adhesion contract to insurance
Thus as Kessler stated in his classic article on adhesion contracts: “In dealing with standardized contracts courts have to determine what the weaker contracting party could legitimately expect by way of services according to the enterpriser‘s ‘calling‘, and to what extent the stronger party disappointed reasonable expectations based on the typical life situation.” (Kessler, Contracts of Adhesion (1943) 43 Colum.L.Rev. 629, 637.)
Thus we held in Steven v. Fidelity & Casualty Co., supra, 58 Cal.2d 862, that we would not enforce an exclusionary clause in an insurance contract which was unclear, saying: “If [the insurer] deals with the public upon a mass basis, the notice of noncoverage of the policy, in a situation in which the public may reasonably expect coverage, must be conspicuous, plain and clear.” (P. 878.)8
When we test the instant policy by these principles we find that its provisions as to the obligation to defend are uncertain and undefined; in the light of the reasonable expectation of the insured, they require the performance of that duty. At the threshold we note that the nature of the obligation to defend is itself necessarily uncertain.9 Although insurers have often insisted that the duty arises only if the insurer is bound to indemnify the insured, this very contention creates a dilemma. No one can determine whether the third party suit does or does not fall within the indemnification coverage of the policy until that suit is resolved; in the instant case, the determination of whether the insured engaged
Although this uncertainty in the performance of the duty to defend could have been clarified by the language of the policy we find no such specificity here.10 An examination of the policy discloses that the broadly stated promise to defend is not conspicuously or clearly conditioned solely on a nonintentional bodily injury; instead, the insured could reasonably expect such protection.
The policy is a “comprehensive personal liability” contract; the designation in itself connotes general protection for alleged bodily injury caused by the insured. The insurer makes two wide promises: “[1.] To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage, and [2.] the company shall defend any suit against the insured alleging such bodily injury or property damage and seeking damages which are payable under the terms of this endorsement, even if any of the allegations of the suit are groundless, false, or fraudulent“: clearly these promises, without further clarification, would lead the insured reasonably to expect the insurer to defend him against suits seeking damages for bodily injury, whatever the alleged cause of the injury, whether intentional or inadvertent.
But the insurer argues that the third party suit must seek “damages which are payable under the terms of this endorsement“; it contends that this limitation modifies the general duty to defend by confining the duty only to actions seeking
The very first paragraph as to coverage, however, provides that “the company shall defend any such suit against the insured alleging such bodily injury” although the allegations of the suit are groundless, false or fraudulent. This language, in its broad sweep, would lead the insured reasonably to expect defense of any suit regardless of merit or cause. The relation of the exclusionary clause to this basic promise is anything but clear. The basic promise would support the insured‘s reasonable expectation that he had bought the rendition of legal services to defend against a suit for bodily injury which alleged he had caused it, negligently, nonintentionally, intentionally or in any other manner. The doctrines and cases we have set forth tell us that the exclusionary clause must be “conspicuous, plain and clear.” (Steven v. Fidelity & Casualty Co., supra, 58 Cal.2d 862, 878.) This clause is not “conspicuous” since it appears only after a long and complicated page of fine print, and is itself in fine print; its relation to the remaining clauses of the policy and its effect are surely not “plain and clear.”
A further uncertainty lurks in the exclusionary clause itself. It alludes to damage caused “intentionally by or at the direction of the insured.” Yet an act of the insured may carry out his “intention” and also cause unintended harm. When set next to the words “at the direction of the insured” the word “intentionally” might mean to the layman collusive, wilful or planned action beyond the classical notion of intentional tort.11 This built-in ambiguity has caused debate and refined definition in many courts;12 in any event, the word surely cannot be “plain and clear” to the layman.
The insured is unhappily surrounded by concentric circles of uncertainty: the first, the unascertainable nature of the
The insurer counters with the contention that this position would compel an insurer “issuing a policy covering liability of the insured for maintenance, use or operation of an automobile ... to defend the insured in an action for damages for negligently maintaining a stairway and thereby allegedly causing injury to another-because the insured claims that the suit for damages was false or groundless.” The “groundless, false, or fraudulent” clause, however, does not extend the obligation to defend without limits; it includes only defense to those actions of the nature and kind covered by the policy. Here the policy insures against “damages because of bodily injury.” As we have pointed out, in view of the language of the policy, the insured would reasonably expect protection in an action involving alleged bodily injury. On the other hand the insured could not reasonably expect protection under an automobile insurance policy for injury which occurs from defect in a stairway. Similarly an insured would not expect a
We look to the nature and kind of risk covered by the policy as a limitation upon the duty to defend; we cannot absolve the carrier from the duty to defend an insured for loss of the nature and kind against which it insured.14
Our holding that the insurer bore the obligation to defend because the policy led plaintiff reasonably to expect such defense, and because the insurer‘s exclusionary clause did not exonerate it, cuts across defendant‘s answering contention that the duty arises only if the pleadings disclose a cause of action for which the insurer must indemnify the insured. Defendant would equate the duty to defend with the complaint that pleaded a liability for which the insurer was bound to indemnify the insured. Yet even if we accept defendant‘s premises, and define the duty to defend by measuring the allegations in the Jones case against the carrier‘s liability to indemnify, defendant‘s position still fails. We proceed to discuss this alternative ground of liability of the insurer, accepting for such purpose the insurer‘s argument that we must test the third party suit against the indemnification coverage of the policy. We point out that the carrier must defend a suit which potentially seeks damages within the coverage of the policy; the Jones action was such a suit.15
To restrict the defense obligation of the insurer to the precise language of the pleading would not only ignore the thrust of the cases but would create an anomaly for the insured. Obviously, as Ritchie v. Anchor Casualty Co., supra, 135 Cal.App.2d 245, points out, the complainant in the third party action drafts his complaint in the broadest terms; he may very well stretch the action which lies in only nonintentional conduct to the dramatic complaint that alleges intentional misconduct. In light of the likely overstatement of the complaint and of the plasticity of modern pleading, we should hardly designate the third party as the arbiter of the policy‘s coverage.
Since modern procedural rules focus on the facts of a case rather than the theory of recovery in the complaint, the duty to defend should be fixed by the facts which the insurer learns from the complaint, the insured, or other sources. An insurer, therefore, bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability
Jones’ complaint clearly presented the possibility that he might obtain damages that were covered by the indemnity provisions of the policy. Even conduct that is traditionally classified as “intentional” or “wilful” has been held to fall within indemnification coverage.16 Moreover, despite Jones’ pleading of intentional and wilful conduct, he could have amended his complaint to allege merely negligent conduct. Further, plaintiff might have been able to show that in physically defending himself, even if he exceeded the reasonable bounds of self-defense, he did not commit wilful and intended injury, but engaged only in nonintentional tortious conduct. Thus, even accepting the insurer‘s premise that it had no obligation to defend actions seeking damages not within the indemnification coverage, we find, upon proper measurement of the third party action against the insurer‘s liability to indemnify, it should have defended because the loss could have fallen within that liability.
We turn to the insurer‘s second major contention that the contract cannot be read to require the insurer to defend an action seeking damages for an intentional wrong because such an obligation would violate public policy. In support of this argument it relies upon
The contention fails on two grounds. In the first place, the statutes forbid only contracts which indemnify for “loss” or “responsibility” resulting from wilful wrongdoing. Here we deal with a contract which provides for legal defense against an action charging such conduct; the contract does not call for
Nor can we accept defendant‘s argument that the duty to defend dissolves simply because the insured is unsuccessful in his defense and because the injured party recovers on the basis of a finding of the assured‘s wilful conduct. Citing Abbott v. Western Nat. Indem. Co. (1958) 165 Cal.App.2d 302 [331 P.2d 997], the insurer urges that if the judgment in a third party suit goes against the insured it operates as “res judicata or collateral estoppel in the insured‘s action or proceeding against the insurer.”
We have explained that the insured would reasonably expect a defense by the insurer in all personal injury actions against him. If he is to be required to finance his own defense and then, only if successful, hold the insurer to its promise by means of a second suit for reimbursement, we defeat the basic reason for the purchase of the insurance. In purchasing his insurance the insured would reasonably expect that he would stand a better chance of vindication if supported by the resources and expertise of his insurer than if compelled to handle and finance the presentation of his case. He would, moreover, expect to be able to avoid the time, uncertainty and capital outlay in finding and retaining an attorney of his own. “The courts will not sanction a construction of the insurer‘s language that will defeat the very purpose or object of the insurance.” (Ritchie v. Anchor Casualty Co., supra, 135 Cal.App.2d 245, 257.)
Similarly, we find no merit in the insurer‘s third contention that our holding will embroil it in a conflict of interests. According to the insurer our ruling will require defense of an action in which the interests of insurer and insured are so opposed as to nullify the insurer‘s fulfillment of its duty of defense and of the protection of its own interests. For example, the argument goes, if defendant had defended against the Jones suit it would have sought to estab-
Since, however, the court in the third party suit does not adjudicate the issue of coverage, the insurer‘s argument collapses. The only question there litigated is the insured‘s liability. The alleged victim does not concern himself with the theory of liability; he desires only the largest possible judgment. Similarly, the insured and insurer seek only to avoid, or at least to minimize, the judgment. As we have noted, modern procedural rules focus on whether, on a given set of facts, the plaintiff, regardless of the theory, may recover. Thus the question of whether or not the insured engaged in intentional conduct does not normally formulate an issue which is resolved in that litigation.18
In any event, if the insurer adequately reserves its right to assert the noncoverage defense later, it will not be bound by the judgment. If the injured party prevails, that party or the insured will assert his claim against the insurer.19 At this time the insurer can raise the noncoverage defense previously reserved. In this manner the interests of insured and insurer in defending against the injured party‘s primary suit will be identical; the insurer will not face the suggested dilemma.
Finally, defendant urges that our holding should require only the reimbursement of the insured‘s expenses in defending the third party action but not the payment of the judgment. Defendant acknowledges the general rule that an insurer that wrongfully refuses to defend is liable on the judgment against the insured. (Arenson v. National Automobile & Cas. Ins. Co. (1955) 45 Cal.2d 81, 84 [286 P.2d 816];
We rejected a similar proposal in Tomerlin v. Canadian Indemnity Co., supra, 61 Cal.2d 638, 649-650. In that case, as we have noted, the insurer‘s obligation to defend arose out of estoppel. The insurer contended that we should apply a “tort” theory of damages to its wrongful refusal to defend. Such a theory, we explained, would impose upon the insured “the impossible burden” of proving the extent of the loss caused by the insurer‘s breach.
As this court said in an analogous situation in Arenson v. National Auto. & Cas. Ins. Co. (1957) 48 Cal.2d 528, 539 [310 P.2d 961]: “Having defaulted such agreement the company is manifestly bound to reimburse its insured for the full amount of any obligation reasonably incurred by him. It will not be allowed to defeat or whittle down its obligation on the theory that plaintiff himself was of such limited financial ability that he could not afford to employ able counsel, or to present every reasonable defense, or to carry his cause to the highest court having jurisdiction, ... Sustaining such a theory ... would tend ... to encourage insurance companies to similar disavowals of responsibility with everything to gain and nothing to lose.”
In summary, the individual consumer in the highly organized and integrated society of today must necessarily rely upon institutions devoted to the public service to perform the basic functions which they undertake. At the same time the consumer does not occupy a sufficiently strong economic position to bargain with such institutions as to specific clauses of their contracts of performance, and, in any event, piecemeal negotiation would sacrifice the advantage of uniformity. Hence the courts in the field of insurance contracts have tended to require that the insurer render the basic insurance protection which it has held out to the insured. This obligation becomes especially manifest in the case in which the insurer has attempted to limit the principal coverage by an unclear exclusionary clause. We test the alleged limitation in the light of the insured‘s reasonable expectation of coverage; that test compels the indicated outcome of the present litigation.
The judgment is reversed and the trial court instructed to take evidence solely on the issue of damages alleged in plaintiff‘s complaint including the amount of the judgment in the
Traynor, C. J., Peters, J., Peek, J., Mosk, J., and Burke, J. concurred.
MCCOMB, J.----I dissent. I would affirm the judgment for the reasons expressed by Mr. Justice Fox in the opinion prepared by him for the District Court of Appeal in Gray v. Zurich Ins. Co. (Cal.App.) 49 Cal.Rptr. 271.